SECTION 5. TAXABLE YEAR — Internal Revenue Bulletin 2005-22

WHICH SECTION 965 APPLIES

.01 In General

Section 965(f) provides that a taxpayer may elect to apply section 965 to either the

taxpayer’s last taxable year beginning before October 22, 2004, or the taxpayer’s first taxable year starting during the oneyear period beginning on October 22, 2004 (eligible year). Thus, assuming that the other requirements of section 965 are met, a taxpayer may elect to apply the section 965(a) DRD with respect to cash dividends (as defined for purposes of section 965(a)) received by a U.S. shareholder from its CFCs in an eligible year. Except as otherwise provided in this section 5, an eligible year may include a short taxable year.

.02 Consolidated Groups

For taxpayers that are members of a consolidated group, the common parent may elect on behalf of all the members to apply section 965 to one of the group’s eligible years. The election applies to each member of the group that is included in the group’s income tax return for that eligible year, but only for the portion of the eligible year during which such member is a member of the group. Further, every member can receive a cash dividend from a CFC that otherwise qualifies under section 965(a) during any period the recipient is a member of such group. This rule applies even if: (1) as a result of a subsidiary entering or leaving the group, the group’s election year is, with respect to the particular subsidiary, neither the taxable year that includes October 22, 2004, nor the subsequent taxable year; or (2) a previous separate return year of the subsidiary also was an election year for the subsidiary. This rule also applies as a result of the acquisition of a consolidated group by an unrelated consolidated group, where the previous separate return year of the acquired group was an election year.

Under the rules of the preceding paragraph, if a subsidiary leaves the group during the group’s election year, cash dividends received from the subsidiary’s CFCs during its short taxable year that ends within the group’s election year are eligible for the group’s election. As a result, dividends received by the subsidiary during that initial short taxable year can be eligible for the section 965(a) DRD. Moreover, dividends received by the subsidiary during its next short taxable year as part of an acquiring group may also be eligible for the section 965(a) DRD.

2005–22 I.R.B. 1104 May 31, 2005

In addition, if the departing subsidiary is not immediately thereafter a subsidiary member of another group, it may treat its next short taxable year as an eligible year and make an election under section 965 for that year, even if that next taxable year is neither the taxable year for that subsidiary that includes October 22, 2004, nor the subsequent taxable year, provided that the two short taxable years together do not exceed twelve months (or an equivalent 52–53 week year). General consolidated return principles apply to reverse acquisitions as defined in Treas. Reg. §1.1502–75(d)(3), so that the taxable year of the continuing group governs its available eligible years and the terminating group members are subject to the general rules for members leaving and entering groups, with the common parent in effect treated as having become a subsidiary of the continuing group.

.03 Examples

The following examples illustrate the application of the rules of section 965(f) and this section 5.

Example 1 . Member included in election year of different consolidated groups . (i) Facts . USP is the common parent of a calendar year consolidated group that elects to apply section 965 for its taxable year ending December 31, 2004. US1 is a member of the USP group and a U.S. shareholder. USB is the common parent of an unrelated consolidated group that elects to apply section 965 to its taxable year ending June 30, 2005. A member of the USB group acquires all the stock of US1 on November 15, 2004.

(ii) Result . Because US1 is included in the USP group during the USP group’s section 965 election year (January 1, 2004, through December 31, 2004), US1’s taxable year beginning January 1, 2004, and ending on November 15, 2004 is an election year during which cash dividends received from US1’s CFCs may be eligible for the section 965(a) DRD. In addition, because US1 is included in the USB group during the USB group’s election year (July 1, 2004 through June 30, 2005), cash dividends from US1’s CFCs during US1’s taxable year beginning on November 16, 2004 and ending June 30, 2005, may be eligible for the section 965(a) DRD of the USB group.

(iii) Alternative facts . If USB instead makes an election under section 965 for its taxable year ending June 30, 2006, cash dividends from US1’s CFCs during the USB group’s election year may still be eligible for the section 965(a) DRD. In this case, however, that election year is US1’s taxable year from July 1, 2005, through June 30, 2006. Section 965 will not apply to US1’s year beginning November 16, 2004, and ending June 30, 2005.

Example 2 . Special rule for member departing but not joining a consolidated group . (i) Facts . Assume the same facts as in Example 1, except instead

of being acquired by an unrelated consolidated group, the stock of US1 is distributed to the shareholders of USP on November 15, 2004, and US1 becomes the common parent of a new consolidated group which also maintains a taxable year ending December 31.

Example 3 . Acquisition of target resulting in sin- gle short election year . (i) Facts . USP is the common parent of a calendar year consolidated group that elects to apply section 965 for its taxable year ending December 31, 2004. US1 is a member of the USP group and a U.S. shareholder. On November 15, 2004, the stock of US1 is distributed to the shareholders of USP; after such distribution, US1 is not a member of a consolidated group and therefore files a separate return. USB is the common parent of an unrelated consolidated group that plans to apply section 965 to its taxable year ending December 31, 2005. On December 15, 2005, US1 purchases all the stock of USB for cash. US1 and its subsidiaries elect to file a consolidated return for the taxable year ending December 31, 2005.

(ii) Result . Because the taxable year ending December 31, 2004, is the USP group’s election year, US1’s taxable year beginning January 1, 2004, and ending on November 15, 2004, is an election year during which cash dividends received from US1’s CFCs may be eligible for the section 965(a) DRD. Further, because US1 ceased to be a member of the USP group during its election year and did not become a subsidiary member of another consolidated group, US1 may make an election under section 965 for its short taxable year that begins on November 16, 2004, and ends on December 31, 2004. However, 2005 is not an eligible year for US1 or its consolidated group. The USB group’s final taxable year ends on December 15, 2005, when it is acquired by US1. That short taxable year is an eligible year for which the USB group may make an election under section 965. Thereafter, the members of the former USB group will become members of the US1 group. Because the USB group was acquired after the US1 election year, the former USB group members may not participate in an election under section 965 for any period after December 15, 2005.

Example 4 . Effect of reverse acquisition . (i) Facts . Assume the same facts as in Example 3, except that US1’s acquisition of USB is for US1 stock rather than cash and the acquisition is a reverse acquisition described in Treas. Reg. §1.1502–75(d)(3).

(ii) Result . Under Treas. Reg. §1.1502– 75(d)(3)(i), the USB group is treated as continuing to exist after the reverse acquisition with US1 as its common parent. The USB group’s taxable year end

ing December 31, 2005, is an eligible year for which the group may make an election under section 965. This election applies to cash dividends received by US1 after the acquisition when US1 was in the USB consolidated group (the period beginning December 16, 2005, and ending December 31, 2005), as well as to dividends received by the USB group members during the calendar year while USB was the common parent. As in Example 3, US1’s short taxable year that begins on November 16, 2004 and ending on December 31, 2004, is an eligible year. However, US1’s taxable year beginning January 1, 2005, and ending December 15, 2005, is not an eligible year for US1.

Example 5 . Consolidated group included in elec- tion year of different consolidated groups . (i) Facts . Assume the same facts as in Example 1 (i), except that a member of the USB group acquires the USP group on November 15, 2004, and the USP group makes an election under section 965(a) for the taxable year January 1, 2004 through November 15, 2004.

(ii) Result . Because the USP group’s election year is January 1, 2004 through November 15, 2004, USP’s taxable year beginning January 1, 2004, and ending on November 15, 2004, is an election year during which cash dividends received from the USP group’s CFCs may be eligible for the section 965(a) DRD. In addition, because USP is included in the USB group during the USB group’s election year (July 1, 2004 through June 30, 2005), cash dividends from the USP group’s CFCs during USP’s taxable year beginning on November 16, 2004 and ending June 30, 2005 may be eligible for the section 965(a) DRD of the USB group. If, in the alternative, USB elects to apply section 965 to its taxable year ending June 30, 2006, cash dividends from the USP consolidated group’s CFCs during USP’s taxable year beginning July 1, 2005, and ending June 30, 2006, may be eligible for the section 965 DRD of the USB consolidated group.